Saturday, March 28, 2015

Thomas Piketty's "Capital in the Twenty-First Century" is the landmark economics book of our time, not because it is especially advanced in an academic sense, but because it situates basic questions of wealth and its distribution within a very long historical perspective, raising questions about where we want to be and go as a society. The profession of economics rose to prominence in the twentieth century, when high growth was the norm and when very significant disruptions happened which had reduced the role of inherited, accumulated capital. This turns out not to be a regime that could go on forever, but rather a very unusual condition that has blinded the profession to other forms of capitalism. Through the longer history, low growth and a very heavy weight of inherited capital, combined with its strongly unequal distribution, was the norm, creating feudal or feudal-like conditions. With the Occupy movement, this realization of where we are headed hit the wider culture, but Piketty provides the data, the in-depth research, the historical perspective, and the prescription for what to do about it.

While one cause of all this inequality was, traditionally, straightforward war and seizure (think of the Norman invasion of Britain), the other reason, and why such inequality becomes so entrenched, is (apart from political and social factors) that capital always commands a price, roughly 5% (typically as land rent, in the old days). So if an economy grows at only 1% or less, which is traditional, and capital returns 5%, then capital will grow continuously, relative to the rest of the economy, in perpetuity. And indeed, the more capital one starts with, the more efficiently it can be managed and the higher return it yields.

It is a bit like a casino where the house always earns 5%. Now imagine that the doors are shut and no one can leave. All the chips eventually find their way to the house, and economic activity winds down to nothing (or solely what the house spends for its own consumption, which may be minimal) due to the immiseration of the gambling masses. If the house makes loans to its customers, this only delays the inevitable, since they those customers will never have the means to repay. In the very old days when kings ruled the land, their generosity was critical for economic functioning. If they spent all their time hording their treasure instead of distributing it, everyone else lived in abject poverty.

The only countervailing factors are disruptions like war and revolution, unusual growth either demographic or technological, or, at the terminus after very high accumulation, a slackening of the return on capital, if there is truly too much of it relative to a slackening economic activity. Marx, incidentally, realized this, and assumed that wealth increases forever, and thus requires a revolution for corrective redistribution. Hopefully we can do better. The irony is that the French revolution, by Piketty's data, did very little to redistribute wealth, even as it did so much to redistribute heads. And the Soviet revolutions revealed the significant importance that private capital does have, even if it tends to become maldistributed over time.

All this was touched on in part 1. Now that capital has recovered in the rich countries since the disruptions of the twentieth century to a roughly normal level of five to eight times annual national income, the process of its concentration is proceeding to create a rentier society where a large aristocracy of wealth controls the economic system. In addition, it bids to control the political system as well, and will inevitably reshape the social system to reflect its dominance. Piketty also points out that such inequality saps the ability of a middle class to exist, exacerbates financial instability, and reduces overall prosperity due to a lack of income among the majority of the population. One only has to compare our current time, or the Belle Epoch of France, (for example as portrayed in the novels of Marcell Proust, whose narrator is endlessly besotted with social climbing up the aristocratic ladder of his day), to the very middle class post-war era in the US to understand this remarkable contrast.

"The history of the progressive tax over the course of the twentieth century suggests that the risk of a drift toward oligarchy is real and gives little reason for optimism about where the United States is headed. Is was war that gave rise to progressive taxation, not the natural consequences of universal sufferage. The experience of France in the Belle Époque proves, if proof were needed, that no hypocrisy is too great when economic and financial elites are obliged to defend their interests- and that includes economists, who currently occupu an enviable place in the US income hierarchy. Some economists have an unfortunate tendency to defend their own private interests while implausibly claiming to champion the general interest. Although data on this are sparse, it also seems that US politicians of both parties are much wealthier than their European counterparts and in a totally different category from the average American, which might explain why they tend to confuse their own private interest with the general interest. Without a radical shock, it seems fairly likely that the current equilibrium will persist for some time. The egalitarian pioneer ideal has faded into oblivion, and the New World may be on the verse of becoming the Old Europe of the twenty-first century's globalized economy."

So, here we are, and it isn't pretty. What does Piketty propose to do about it? He has several axes to grind, actually. But above all he points out the absurdity of living in an epoch of supposedly democratic capitalism, and not knowing who owns what ... not knowing where the money is. We have an income tax that reveals in quite thorough fashion (to the government, at least) what each person's income is. But wealth? That is a completely different story. Piketty has had to piece together his academic wealth data from all sorts of odds and ends, mostly unsatisfactory. He even descends to using the Forbes list of billionaires, hardly a rigorous trove of data. So goal one is basic transparency, so that we, as citizens, can see what is going on.

Second, and drawing his most vituperative comments, are the existence of tax havens like the tiny countries of Europe, Luxembourg, Switzerland, Cyprus, etc., which parasitise on their larger neighbors by relieving them of the taxes of their richest citizens. For us in the US, the Cayman Islands come to mind, home to much of Mitt Romney's wealth. This race to the bottom of financial governance is appalling, and has no place in a just and well-run world.

Third comes the actual aim of mitigating large fortunes so that they do not grow without end to create a parasitic class of rentiers. These aims come together in his proposal of a global annual wealth tax of, say, 1%. It would require reporting and thus transparency. Indeed it would involve reporting directly from the accounts held, much as income is currently reported directly and automatically by the W2 form in the US. It would be global and thus eliminate the possibility of escape, subterfuge, and regulatory competition. And it would be substantial, stemming the natural process of feudalization that is the path we are on, not just in the US, but world-wide.

Over a generation, this tax would be roughly equivalent to a 30% estate tax, which in my view is, frankly, not enough. Piketty does recommend that this tax be progressive, rising to as high as 5% on very large fortunes. But if their return is in the 5-10% range, then their growth will only be slowed, not stemmed. The very idea that priviliged children get not only their genes from their parents, and a lifetime of educational and social advantages, but also enormous piles of money, is abhorrent as well as wasteful. If they are so talented by way of their natural advantages, why should they, of all people, not benefit society by working? As a society, our interest is in harnessing the talents of everyone to the fullest extent. Allowing substantial wealth inheritance flies completely against this principle, and isn't very healthy for the recipients of such largesse, either. As a "rights" issue, the rights of the parent to bequeth as he or she sees fit should not extend to the right of children to come into enormous estates just because they happen to be born to Thistlewaite and Ambrosia Moneybags. Society at large needs to come in between to restore some semblence of justice here. It is the epitome of what used to be called "unearned income".

"In other words, Liliane Bettencourt, who never worked a day in her life, saw her fortune grow exactly as fast as that of Bill Gates, the high-tech pioneer, whose wealth has incidentally continued to grow just a rapidly since he stopped working. Once a fortune is established, the capital grows according to a dynamic of its own, and it can continue to grow at a rapid pace for decades simply because of its size. ... Money tends to reproduce itself."

Along the way, Piketty devotes a brief chapter to the public debt crisis. As an MMT acolyte, I am not sure why he regards it as a crisis, (apart from Europe, where the confused system of not-really-sovereign debt truly is in crisis), or why paying it off is seen as good, or what point there is in calculating the net wealth position of the public sector. (Which is zero: public assets are typically balanced by public debt). Since it prints the currency and manages the entire monetary as well as military and taxation system, the wealth of a truly sovereign state is effectively (potentially) infinite, depending only on our collective desires and productivity. Piketty's biggest beef is that the public is obliged to pay its public bondholders interest in perpetuity- money that could be better spent elsewhere, like on education- and that the rich should be paying this money in taxes rather than lending in return for continual income. Which is a fair point. He offers that a one-time wealth tax of roughly 15% would suffice to eliminate public debt entirely. Not a bad thing, I am sure, but hardly the most important policy need, other than in Europe. I guess the basic issue is whether the interest paid on public bonds is onerous or not. It has been an extra burden during the time when inflation was winding down from the high of the seventies, involving a bonus payment for inflation risk, and monetary lag. But now, with rates roughly at zero, and probably destined to remain at the inflation level for a long time to come, the net burden for truly sovereign debt seems to be relatively low.

Piketty secondly promotes the idea of higher taxes on income at the highest brackets, going back to roughly 80%. He spends quite a bit of space demonstrating that the wealth divergence in the US owes more, as yet, to the amazing income of high-level executives than to the build-up of "old money". Old money will surely come as a maturing vintage, as it has in France. These super-high incomes are not due to the super-talented artists, athletes, and inventors. No, it is (95%) the suited class of high-level corporate managers, by far: people Piketty terms "super-managers". Not because they manage particularly well- the data shows conclusively that that is not the case. But "super" from how much corporate wages and profits they have been able to capture, out from under the noses of workers on one side, and shareholders on the other. And one proven way to discourage such greed - perhaps better called embezzlement - is to place confiscatory tax rates on excessively high incomes.

It goes without saying, of course, that unearned income such as dividends, interest, and capital gains, should be taxed at least as high, if not higher, than labor income. How we all got bamboozzled by the Reagan era's pro-capital ideology (double-taxation! entrepreneurialism!) is frankly hard to understand. (Piketty engages in a subtle discussion of the point of corporate income taxation while dividends and capital gains are simultaneously taxed.) When all is said and done, the Piketty program would thoroughly undo the "Reagan Revolution" of greed, which led as surely as night follows day to the inequality, the high indebtedness, the corporate short-term-ism, the lower-class misery, the public poverty, and the financial instability we see today. The question is whether our politics have already been so captured by the 1% that Piketty's program is as impossible as the entire commentariat seems to think. Stranger things have happened, in the US, not so long ago.

Krugman on recent GOP budgets, involving trillion dollar asterisks: "Think about what these budgets would do if you ignore the mysterious trillions in unspecified spending cuts and revenue enhancements. What you’re left with is huge transfers of income from the poor and the working class, who would see severe benefit cuts, to the rich, who would see big tax cuts. And the simplest way to understand these budgets is surely to suppose that they are intended to do what they would, in fact, actually do: make the rich richer and ordinary families poorer."